Introduction
This chapter presents an economic overview of emerging markets and their role in a global economy. In the first section, we discuss a definition of emerging markets. Section “Geography of Emerging Markets” is devoted to geography and regionalization of emerging markets. In the third section, we analyze economic potential of emerging markets (i.e., their increasing share in a global economy). In section “Macroeconomic Performance of Emerging Markets” we look at macroeconomic performance of emerging markets in the first two decades of the twenty-first century. Section “Emerging Markets and Macroeconomic Stability” presents major episodes of macroeconomic and financial instability in emerging markets since the beginning of the 1980s. Finally, section “Potential Risk Factors” discusses challenges and risks ahead.
Definition of Emerging Markets
Emerging market is a popular term used every day in academic papers, economic and financial market analyses, and media news. First time it was applied in 1981 by Antoine van Agtmael from the International Finance Corporation (Economist 2017). Despite its popularity, there is no single definition of emerging markets in an economic literature and, quite often, no definition at all. Intuitively, one can define emerging-market economy (EME) as a middle-income economy integrated into the world economy in terms of trade, investment, and financial flows but with immature and imperfect market mechanisms and institutions. That is, in practical terms, this group neither includes those economies, that already graduated to the group of high-income countries nor low-income countries with underdeveloped financial sectors.
Absence of a single definition makes empirical identification of emerging-market economies difficult, subject of arbitrary choice.
For example, the semi-annual World Economic Outlook (WEO) of the International Monetary Fund (IMF) divides all countries into two broad categories – 39 advanced economies (AEs) and 155 emerging market and developing economies (EMDEs) (WEO 2019b, pp. 125–130). However, it offers neither explicit definition of both categories, nor operational criteria of classification used. Implicitly, AEs are characterized by a high-income level but this criterion is not used consequently. In 2018, the lowest GDP per capita in purchasing power parity (PPP) terms in current international dollars in the AE group was recorded by Greece ($29,072) while there were 15 EMDEs with higher, in some cases (Gulf countries and Brunei Darussalam) much higher, GDP per capita level. Apart from oil producers, this group of 15 countries included four Caribbean countries (i.e., Aruba, the Bahamas, Trinidad and Tobago, and St. Kitts and Nevis), Poland, Hungary, Malaysia, and Seychelles.1 A part of this paradox can be explained by including all members of the Euro Area (EA) regardless of their GDP per capita level to the AE category. However, even without EA members the division between both categories remains inconsequent vis-à-vis income-per-capita level.
Even less clear is an internal disaggregation between emerging markets and developing economies within the EMDE category, which comprises countries with GDP per capita in purchasing power parity (PPP) terms ranging from $733 (Burundi) to $129,638 (Qatar). However, if one excludes from the EMDE group 60 countries considered by the IMF as either low-income developing countries, or heavily indebted poor countries (HIPC), or both, the potential list of emerging markets goes down below 100.
The World Bank, in turn, does not use the category of “emerging markets” in its country classification.2 Instead, it divides countries into four groups with clearly defined income brackets measured in Gross National Income (GNI) per capita using the World Bank Atlas method.3 Respectively, these groups are defined in the 2020 fiscal year as:
- Low-income ($1025 or less) – 31 economies in 2018;
- Lower-middle-income (between $1026 and $3995) – 47 economies in 2018;
- Upper-middle-income (between $3996 and $12,375) – 60 economies in 2018;
- High-income ($12,376 and more) – 80 economies in 20184.
Based on the above classification one can consider upper-middle-income economies and some lower-middle-income and high-income economies as meeting the above intuitive definition of emerging markets.
Geography of Emerging Markets
As in the case of definition, there is no single geographical breakup of emerging markets. Their regional grouping depends on either individual analytical convention or institutional settings within international financial and development institutions or commercial institutions that deal with emerging markets. For example, until very recently the IMF WEO (2019a) used the following regional grouping:
- Emerging and Developing Asia (EDA);
- Commonwealth of Independent States (CIS);
- Emerging and Developing Europe (EDE)—until 2013 this region was called Central and Eastern Europe (CEE);
- Latin America and Caribbean (LAC);
- Middle East and North Africa (MENA)5;
- Sub-Saharan Africa (SSA).
This grouping was a subject of minor adjustments. For example, countries that adopted Euro were moved from the CEE/EDE group to AE group, and Pakistan was added to MENA region in April 2013. However, its basic architecture stayed intact for more than two decades. However, the October 2019 WEO (WEO 2019b) abandoned the CIS regional group. Belarus, Moldova, Russia, and Ukraine were added to EDE group while remaining 8 countries of the Southern Caucasus and Central Asia were added to the MENA, constituting a new region of Middle East and Central Asia (MECA). Although the new WEO regions better reflect the internal IMF structure of area departments they are not necessarily more homogenous in geographic and economic terms.
The World Bank regional grouping used, for example, in the World Development Indicators (WDI) statistics, strictly reflects its internal institutional structure (regional vice-presidencies):
- East Asia and Pacific (EAP);
- Europe and Central Asia (ECA);
- Latin America and Caribbean (LAC);
- Middle East and North Africa (MENA);
- North America (NA);
- South Asia (SA);
- Sub-Saharan Africa (SSA).
Furthermore, these regional groups include all countries regardless of their income status. While the North American region includes only high-income countries and can be excluded from emerging-market analysis other regions are less homogenous. Hence, use of the World Bank region grouping for an analysis of emerging markets requires at least exclusion of both high-income and low-income countries in each region (in principle, doable in WDI statistical database).
The similar approach based on intra-institutional structure or political convenience rather than strictly geographic and socio-economic criteria is adopted by most other international organizations (for example, UN agencies), regional development banks, and integration blocks such as the EU. To some extent, this also concerns classification used by various commercial institutions such as global banks, insurance companies, investment funds, or non-financial corporations.